Investment Savings Account Options for Kids

Coverdell / Educational Savings Plans- You can use these to pay for education at all grades and levels however the max that can be contributed each year is $2,000.

• Once funds are contributed to the plan, they belong to the beneficiary and not the custodian parent- this could affect their FAFSA and the opportunity to get future grant money since it is in the student’s name.
• These are becoming rarer; you could layer them with a 529 and Roth IRA with the intention of using these funds for primary education if you would like.
• These are not common at all due to the low contribution rates and the income caps of $95,000 (single) and $190,000 (married filing joint).

College Savings 529 plan- The Custodian/ Parent has all the control in these plans, and they can change the beneficiary/ student at any point. It can even be themselves if their kids decide to go another route or get a full ride scholarship! At that point the parents can then use the funds to pay off their own student loan if that is their situation.

• 529 plans cover more than college tuition- they cover educational expenses such as computers, off campus housing (my favorite especially if they rent the house from me), studying abroad
• 529 plans are educational plans but not just for traditional college. They also cover trade schools, licenses, and some certifications.
• With us being in Texas, a non-State Tax state, we don’t get a tax deduction on state taxes from being in our state specific plan, this means we can use the best of the best plans.
• Family can gift as high as the gifting limits allow or they can gift 5X the gifting limit all at once- this is a generational wealth transferring strategy.
• Unused 529 money can now be converted to Roth IRA contributions for the beneficiaries if the beneficiary has been the same beneficiary on the account for 15 years. Contributions can’t exceed annual limits.

Roth IRA– Funding college with a Roth IRA is permitted if you follow the rules, there won’t be the 10% early withdrawal penalty:

• It must be paid directly to an eligible educational institution/ any school that is eligible for federal student aid programs.
• The educational expenses are a little stricter:
  • Tuition and enrollment fees
  • Student activity fees
  • Room and board for students enrolled at least half-time
  • Educational expenses required for a special needs student
• As an advisor, I tend to shy away from this option because most people underfund their retirement. By using this account as a dual-purpose account, it can add fog to the focus of retirement. The fog often clears too late for the generous parent to realize that they may have shot themselves in the foot for retiring when they wanted or having enough to be able to retire comfortably.

Uniform Transfer to Minors Account (a kid’s investment account)/ UTMA- this is a non-educational account that a parent is the custodian on, but the minor owns the assets, and they receive a 1099 under the minor’s social security number.

• The Child can use these funds to start a business, buy a home, pay for a wedding, buy a car, or anything they need in.
• The Child has full control of the assets once they reach 18 years old.
• The assets in this account will be considered the child’s assets when they apply for student loans and grants on the FAFSA.
• I have clients that love the flexibility of this account and use it as an introduction to invest for their children.